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Earnings Scorecard: Strayer

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The dwindling economy coupled with stringent regulatory environment and falling enrollments are making life tougher for education companies, and Strayer Education, Inc. (STRA) remains no exception. The for-profit education institutions are now restraining from aggressive admission practices amidst condemnation related to the issue of a rise in the default rate of student loans

Strayer Education recently reported fourth-quarter 2011 results, and in the following paragraphs we will discuss the recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.

Last Quarter Synopsis

Strayer Education reported its fourth quarter financial results on February 16, 2012. For-profit education company’s quarterly earnings of $2.30 per share topped the Zacks Consensus Estimate of $2.26, but it plunged 16% from $2.73 in the year-ago quarter.  Management had earlier forecast fourth quarter earnings between $2.24 and $2.26 per share.

Total revenue for the quarter dropped 9% from the prior-year quarter to $155.8 million, attributable to a fall in enrollment, partially offset by a 5% increase in tuition fees, effective January 2011. Total revenue marginally came ahead of the Zacks Consensus Estimate of $155 million. In order to check the falling revenue caused by waning enrollments, Strayer Education implemented a 3% hike in tuition fees with effect from January 2012.

Strayer Education now expects first-quarter 2012 earnings between $2.07 and $2.09 per share based on enrollment for the 2012 winter term and investment plans for new campuses.

(Read our full coverage on this earnings report: Strayer Tops, Enrollment Falls)

Agreement of Estimate Revisions

The agreement of estimate revisions indicates that the majority of the analysts were unidirectional following Strayer Education’s fourth-quarter 2011 results.

In the last 7 days, 8 out of 13 analysts covering the stock lowered their estimates, whereas only 1 analyst raised the same for the first quarter of 2012. For the second quarter, 9 analysts revised their estimates downwards, but none made an upward revision.

For fiscal 2012, 9 analysts revised their estimates downwards, while only 1 analyst moved in the opposite direction in the last 7 days. As for 2013, 6 analysts made a downward revision to their estimates, while none upped their estimates.

What Drives Estimates Revision?

Clearly, a negative sentiment is palpable among most of the analysts, who remain pessimistic on Strayer Education’s performance. Following the earnings release, the Zacks Consensus Estimate has been depicting a downfall with the majority of the analysts remaining bearish on the stock.

Strayer Education’s fourth quarter results failed to impress the analysts, who foresee a downward pressure on the stock in the near future, as the company continues to grapple against falling enrollments. The company said that total enrollment for the 2012 winter term declined 12% to 50,432 students. The company informed that total campus-based students fell 12% to 45,563 and online students slipped 17% to 4,869. The company stated that new student enrollment dropped 8% and continuing student enrollment declined 13%.

The potential risk looming over the education sector is the regulation proposed by the Department of Education that may weigh upon students’ enrollment and the company’s profits. The Department of Education proposed that an educational program could only qualify for Title IV funds, if it helps in achieving gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios.

According to critics, the students flocking to the educational institutions generally use federal loans. The education companies derive a major portion of its revenues from federal student financial aid programs, the Title IV programs. Some of the institutions enroll less-potential students, who after graduating face difficulties in getting a job due to a lack of talent or the challenging economy, and consequently default.

The institutions are under the scanner due to the rise in the default rate of student loans, and are now being asked to submit information relating to recruitment procedures and use of student’s grant. These days the companies are thus adopting stringent admissions criteria.

Magnitude of Estimate Revisions

The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.      

The Zacks Consensus Estimates for both the first and second quarters of 2012 dropped 17 cents and 13 cents to $2.09 and $1.89, respectively, in the last 7 days.

For fiscal 2012 and 2013, the Zacks Consensus Estimates fell 34 cents and 63 cents to $6.88 and $7.26, respectively, in the last 7 days.

Zacks Rank Defining Neutral Stance

Currently, we have a long-term ‘Neutral’ rating on the stock. Moreover, Strayer Education, which competes with Apollo Group Inc. (APOL) and Corinthian Colleges Inc. (COCO), holds a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation.

As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education

Read the Full Research Report on STRA

Read the Full Research Report on APOL

Read the Full Research Report on COCO

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